i 


UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


SUPPLEMENT   TO   TREASURY   DECISIONS 
(T.  O.  30a9) 


TREASURY  DEPARTMENT 
UNITED  STATES  INTERNAL  REVENUE 

III 

REGULATIONS  50 

( Revised  ) 

RELATING  TO  THE 

CAPITAL  STOCK  TAX 

UNDER  THE 

/ 

REVENUE  ACT  OF  1918 

Approved  June  21,1 920 


WASHINGTON 

GOVERNMENT  PRINTING  OFFICE 

1920 


/ 


5 
so 


:! 

u.  REGULATIONS 

RELATINfi    TO    THE 

CAPITAL  STOCK  TAX 

UNDER 

TITLE  X  OF  THE  REVENUE  ACT  OF  1918. 

[Public,  No.  254,  65th  Congress.     H.  R.  J2863.] 

CONTENTS. 

Page. 

Section  iOOO  (a).  Effective  date 5 

Article    1 .  Due  date  of  tax 5 

Section  1.  Corporations  defined  and  distinguished 5 

Article    2.  Corporations 5 

3.  Associations  and  joint-stoc'-'  companies 5 

4.  Limited  partnerships  as  corporations 6 

5.  Limited  partnerships  as  partnerships G 

6.  Partnership  banks 6 

7 .  Massachusetts  trusts G 

8.  Domestic  corporations 7 

9.  Foreign  corporations 7 

Section  1000  (a)  (1).  Tax  on  domestic  corporations 7 

Article  10.  Basis  of  the  tax:  "Carrying  on  or  doing  business" 7 

11.  "Carrying  on  or  doing  business "  illustrated 8 

12.  Not  "doing  business " 9 

13.  Rate  of  tax 9 

14.  Fair  average  value  of  capital  stock 10 

-  15.  Surplus  and  undiwled  profits 10 

16.  Deduction  of  §5,000 10 

Section  1000  (a)  (3).  Tax  on  foreign  corporations 11 

Article  17.  Basis  of  the  tax 11 

18.  Capital  employed  in  the  L^'nited  States 11 

19.  Capital  employed  in  the  United  States  illustrated 12 

20.  Rat!  of  tax 12 

21.  Measure  of  tax 12 

Section  1000  (b).  Tax  on  stock  insurance  companies 12 

Article  22.  Stock  insurance  companies 12 

Section  1000  (c).  Tax  on  mutual  insurance  companies 13 

Article  23.  Mutual  insurance  comj^any 13 

24.  Domestic  mutual  insurance  company:  rate  of  tax 13 

25.  Foreign  mutual  insurance  company:  rate  of  tax 14 

Section  1000  (c).  Exemption  from  tax 14 

231.  Exempt  organizations 14 

200.  "Personal  service  corporation"  defined 15 

1.  "  Government  contract  "  defined 15 

(3) 


Section  1,000  (c).  Exemption  from,  tax — Continued.  Page. 

Article  26.  Corporation  not  in  business  during  preceding  year 15 

27.  Exempt  organizations 16 

(1)  Labor,  agricultural  or  horticultural  organizations 16 

(2)  Mutual  saving-s  banks 16 

(3)  Fraternal  beneficiary  societies,  ordera  or  associations  17 

(4)  Domestic  building  and  loan  associations  and  cooper- 

ative banks  mthout  capital  stock 17 

(5)  Cemetery  companies 17 

(6)  Corporations  organized  and  operated  exclusively  for  re- 

ligious, charitable,  scientific,  or  educational  purposes, 

or  for  the  prevention  of  cruelty  to  children  or  animals  17 

(7)  Business  leagues,  chambers  of  commerce,  or  boards  of 

trade 18 

(8)  C^i^dc  leagues  or  organizations. . .- 19 

(9)  Clubs 19 

(10)  Farmers'  or  other  mutual  hail,  cyclone,  or  fire  insur- 

ance companies,  mutual  ditch  or  irrigation  com- 
panies, mutual  or  cooperative  telephone  companies, 

or  like  organizations  of  a  purely  local  character 19 

(11)  Farmers',  fruit  growers',  or  like  associations 20 

(12)  Corporations  organized  for  the  exclusive  purpose  of 

holding  title  to  property,  etc 20 

(13)  Federal  land  banks  and  national  farm-loan  associations  20 

(14)  Personal  service  corporations 20 

Article  28.  Return  by  corporation  claiming  exemption 22 

Section  330.  Election  to  be  taxed  as  corporation 23 

Article  29.  Election  to  be  taxed  as  corporation 23 

Section  1000  (d).  Returns  public  records 24 

Article  30.  Inspection  of  returns 24 

Section  1305.  Return  of  tax 25 

Article  31.  Return  by  domestic  corporation 25 

32.  Return  by  foreign  corporation 25 

33.  Time  for  making  return 25 

34.  Tentative  return 26 

35.  Return  by  affiliated  corporation 26 

Section  1307.  Payment  of  tax -• 27 

Article  36.  Time  for  payment  of  tax 27 

37.  Abatement  and  refund  of  taxes 27 

Section  1313.  Fractional  part  of  cent 28 

Article  38.  ^Yhen  fractional  part  of  cent  may  be  disregarded 28 

Section  1314.  Medium  of  payment  of  tax 28 

Article  39.  Payment  of  tax  by  uncertified  checks 28 

40.  Procedure  with  respect  to  dishonored  checks 29 

Section  1004.  Credit  for  former  tax 29 

1005.  Doing  business  without  payment  of  tax 29 

Article  41.  Doing  business  without  payment  of  tax 29 

Section  1308.  Penalties.  _ 30 

Article  42.  Penalty  for  nonpayment  of  tax 30 

43.  Penalties  for  failure  to  make  return  and  for  false  return 30 

Section  1309.  Authority  for  regulations 31 

Article  44.  Promulgation  of  regulations -  -  -  31 


CAPITAL  STOCK  TAX. 


EFFECTIVE  DATE. 

Sec.  1000  (a).  That  on  and  after  July  1,  1918,  in  lieu  of  the  tax  imposed  by 
the  first  subdivision  of  section  407  of  the  revenue  act  of  191G — ■    *    *    *. 

Article  1.  Due  date  of  tax. — Tlie  tax  became  effective  as  of 
July  1,  1918,  and  is  to  be  paid  annually  in  advance  for  each,  year 
begianing  July  1,  in  lieu  of  the  capital  stock  tax  imposed  by  the 
Revenue  Act  of  1916.  The  tax  for  the  year  ending  June  30,  1919, 
although  necessarily  not  payable  in  advance,  was  payable  upon  notice 
and  demand  by  the  collector.  See  article  36.  Special  taxes,  of  which 
this  is  one,  become  due  on  the  first  day  of  July  in  each  year,  or  on 
commencing  any  trade  or  business  on  which  such  tax  is  imposed. 
In  the  former  case  the  tax  is  for  one  year,  and  in  the  latter  case  it  is 
for  the  period  from  the  first  day  of  the  month  in  which  the  liabihty 
to  the  special  tax  is  incurred  to  the  first  day  of  July  following.  But 
see  article  26.  No  portion  of  the  tax  is  refundable  where  a  corpora- 
tion ceases  to  do  business  during  the  year. 

CORPORATIONS  DEFINED  AND  DISTINGUISHED. 

Section  1.  That  when  used  in  this  Act — 

***** 

The  term  "corporation"  includes  associations,  joint-stock  companies,  and 
insurance  companies; 

The  term  "domestic"  when  applied  to  a  corporation  or  partnership  meana 
created  or  organized  in  the  United  States; 

The  term  "foreign"  when  applied  to  a  corporation  or  partnership  meana 
created  or  organized  outside  the  United  States; 

The  term  "United  States"  when  used  in  a  geographical  sense  includes 
only  the  States,  the  Territories  of  Alaska  and  Hawaii,  and  the  District  of 
Columbia; 

Art.  2.  Corporations. — The  term  "corporation"  includes  associa- 
tions, joint-stock  companies,  whether  created  by  statute  or  by  con- 
tract, and  insurance  companies,  but  not  partnerships,  properly 
so  called,  and  whether  or  not  organized  for  profit  or  having  a  capital 
stock  represented  by  shares. 

Art.  3.  Associations  and  joint-stock  companies. — Associations  and 
joint-stock  companies  include  organizations,  by  whatever  name 
known,  which  act  or  do  business  in  an  organized  capacity,  whether 
created  under  and  pursuant  to  State  laws,  agreements,  declarationa 

(5) 


of  trust,  or  otherwise,  the  net  income  of  which,  if  any,  is  distributable 
among  the  members  or  shareholders  on  the  basis  of  the  capital  stock 
held  by  each,  or,  where  there  is  no  capital  stock,  on  the  basis  of  the 
proportionate  share  of  capital  which  each  has  or  has  invested  in  the 
business  or  property  of  the  organization.  But  see  articles  4,  5,  6,  7. 
An  organization,  the  membership  interests  in  wliich  arc  transferable 
without  the  consent  of  all  of  the  members,  however  the  transfer  may 
be  otherwise  restricted,  and  the  business  of  which  is  conducted  by 
trustees  or  du^ctors  and  officers  "vvdthout  the  active  participation  of 
all  the  members  as  such,  is  an  association. 

Art.  4.  Limited  partnerships  as  corporations. — Partnei-ships  with 
limited  liability  or  partnership  associations  autliorized  by  the  statutes 
of  Pennsylvania  and  a  few  other  States  are  only  nominally  partner- 
ships. Such  so-called  limited  partnerships,  offering  opportunity  for 
limiting  the  liability  of  all  the  members,  providmg  for  the  trans- 
ferability of  partnership  shares,  and  capable  of  holding  real  estate 
and  bringmg  suit  in  the  common  name,  are  moi-e  trvAj  corporations 
than  partnerships,  and  are  taxable  as  corporations.  In  all  doubtful 
cases  limited  partnerships  will  be  treated  as  corporations  unless  they 
submit  satisfactory  proof  that  they  are  not  m  effect  so  organized. 
Michigan  partnership  associations  are  corporations.  The  liability  of 
Virginia  limited  partnerships  is  determined  in  each  case  from  a 
consideration  of  the  certificate  of  partnership  and  all  pertinent  facts 
relative  thereto. 

Art.  5.  Limitecl  partnerships  as  partnerships. — So-called  limited 
partnerships  of  the  type  authorized  by  the  statutes  of  Nev/  York  and 
most  of  the  States  are  partnerships  and  not  corporations  within  the 
meaning  of  the  statute.  Such  limited  partnerships  which  can  not 
limit  the  liability  of  the  general  partners,,  although  the  special  partner 
enjoy  limited  liability  so  long  as  they  observe  the  statutory  conditions, 
which  are  dissolved  by  the  death  or  transfer  of  the  interest  of  a 
general  partner,  and  which  can  not  hold  real  estate  or  sue  in  the 
partnership  name,  are  so  like  common  law  partnerships  that  they 
can  not  be  difi'erentiatecl  therefrom  for  tax  purposes.  Michigan  and 
Illmois  limited  partnerships  are  partn.ershi])s.  California  special 
partnerships  are  partnerships. 

Art.  6.  Partnership  banks. — A  partnership  bank,  conducted  like  a 
corporation  and  so  organized  that  the  interests  of  its  members  may  be 
transferred  without  the  consent  of  the  other  members,  is  a  joint-stock 
company  or  association  within  the  meaning  of  the  statute.  A 
partnership  bank,  the  mterests  of  whose  membei^  can  not  be  so 
transferred,  is  a  partnership. 

Art.  7.  Massachusetts  trusts, — The  test  of  liabiUty  in  all  cases 
involving  trusts  of  the  Massachusetts  type  is  whether  the  cestuis  que 
trustent  have  by  the  terms  of  the  trust  agreement  a  voice  in  tlie 


management  or  control  of  the  trust.  Where  the  trustees  are  m  com- 
plete control  of  the  busmess,  the  beneficiaries  having  no  control  except 
the  right  of  filling  vacancies  among  the  trustees  or  of  consenting  to  a 
modification  of  the  terms  of  the  trust  or  of  dissolving  the  trust,  no 
association  exists.  If,  however,  the  cestuis  que  trustent  have  a 
voice  m  the  control  or  management  of  the  Ijusmess  of  the  trust, 
whether  through  the  right  to  elect  trustees  periodically  or  to  remove 
the  trustees  or  to  restrict  the  trustees  as  to  the  management  of  the 
trust  or  otherwise,  the  trust  is  an  association  within  the  meaning 
of  the  statute.  Where  the  trustees  hold  in  their  own  right  a  sufficient 
number  of  the  certificates  of  beneficial  interest  to  constitute  control 
as  between  the  beneficiaries,  the  trust  will  be  held  to  be  an  association 
regardless  of  the  powers  conferred  upon  the  trustee  by  the  instrument 
creating  the  trust. 

Art.  8.  Domestic  corporations. — A  domestic  corporation  is  a  cor- 
poration created  or  organized  in  the  United  States,  which  includes  the 
States,  Territories  of  Alaska  and  Hawaii,  and  the  District  of  Columbia. 

Art.  9(,  Foreign  corporations. — A  foreign  corporation  is  a  corpora- 
tion created  or  organized  outside  the  United  States  as  defined  in 

article  8. 

TAX  ON  DOMESTIC  CORPORATIONS. 

Sec.  1000  (a)  (1).  Every  domestic  corporation  shall  pay  annually  a  special 
exciae  tax  with,  respect  to  carrjdng  on  or  doing  business,  equivalent  to  $1  for 
eacb.  §1,000  of  so  much  of  the  fair  average  value  of  its  capital  stock  for  the 
preceding  year  ending  June  30  as  is  in  excess  of  $5,000.  In  e.stimating  the 
value  of  capital  stock  the  surplus  and  undivided  profits  shall  be  included; 

Art.  10.  Basis  of  the  tax:  "Carrying-  on  or  doing  business." — The 
basis  of  the  tax  in  the  case  of  a  domestic  corporation  is  ''carrying  on 
or  doing  business"  in  the  capacity  of  a  corporation,  association,  or 
insurance  company.  The  words  ''carrying  on  or  doing  business" 
must  be  given  their  ordinaiy  and  natural  signification.  "Business" 
is  a  very  comprehensive  term  and  embraces  whatever  occupies  the 
time,  attention  or  labor  of  men  for  the  purpose  of  livelihood  or  profit. 
In  other  words,  business  necessarily  involves  the  idea  of  gain.  The 
true  basis  of  distinction  is,  in  the  first  instance,  between — 

(a)  A  corporation  organized  for  the  purpose  of  doing  business 

as  above  defined,  and 
(6)  A  corporation  organized  for  the  sole  purpose  of  owning  and 
holding  property  and  distributing  its  avails; 
and,  in  the  second  instance,  between — 

(c)  A  corporation  of  class  (a)  which  is  continuing  the  body  and 
substance  of  the  business  for  which  it  was  organized  or  is 
still  active  and  maintaining  its  organization  for  the  pur- 
pose of  continued  eft'orts  in  the  pursuit  of  profit  or  gain, 
and 


8 

(d)  A  corporation  vrhich;   although  included  in  class   (a),  has 
substantial!}"  retired  from  the  business  for  which  it  was 
organized  and  has  reduced  its  activities  to  the  mere  own-- 
ership   and  holding  of  property,   distributing  its  avails, 
and  doing  only  the  acts  necessary  to  the  maintenance  of 
its  corporate  existence  and  the  private  management  of  its 
purely  internal  affairs. 
The  distinction  in  each  case  must  depend  upon  the  peculiar  facts  in 
the  case.     Corporations  of  class  (a)  will  be  presumed  to  be  subject 
to  the  tax  unless  they  submit  proof,  satisf actor\r  to  the  Commissioner, 
that  they  are  not  actually  canning  on  or  doing  business.     If  a  cor- 
poration claim  exemption  on  the  ground  that  it  belongs  to  class  (h), 
it  will  be  required  to  file  an  excerpt  from  its  charter  setting  forth 
its  corporate  powers  together  with  a  full  and  comprehensive  state- 
ment showing  the  nature  of  the  activities  in  which  it  is  and  has  been 
actually  engaged.     If  it  claim  exemption  on  the  ground  that  it  be- 
longs to  class  (d),  it  will  be  required  to  furnish  a  copy  of  any  amend- 
ment of  its  charter,  resolution  of  its  board  of  directors.,  or  other 
evidence,   satisfactory   to   the  Commissioner,   showing  that  it  has 
reduced  its  activities  to  the  mere  ownership  of  property,  receipt  of  its 
avails,  and  the  doing  of  only  what  is  necessary  to  the  maintenance 
of  its  corporate  existence. 

Art.  11.  "Carrying  on  or  doing-  business"  illustrated. — Corpora- 
tions organized  for  the  purpose  of  and  actually  engaged  in  such 
activities  as  buying,  selling,  or  dealing  in  mineral  or  timber  land  or 
other  real  estate;  leasing  property,  collecting  rents,  managing  office 
buildings,  making  investments  of  profits;  leasing  lands  and  collect- 
ing royalties,  managing  wharves,  dividing  profits;  and  in  some  cases 
investing  the  surplus,  are  engaged  in  ''carrying  on  or  doing  business" 
within  the  meaning  of  the  statute. 

A  corporation  organized  for  the  purpose  of,  and  actually  engaged 
in,  buying  mineral  or  timber  land  or  other  real  estate  and  holding  it 
with  a  view  to  future  sale  at  an  advance  is  carrying  on  or  doing 
business. 

A  corporation  organized  for  the  purpose  of  owning  and  leasing 
real  estate  which  has  leased  all  of  the  property  under  its  control  is 
stiU  engaged  in  doing  business  unless,  under  the  terms  of  its  lease, 
its  activities  have  been  reduced  to  the  mere  receipt  and  distribution 
of  the  avails  of  the  leases  at  the  actual  cost  of  so  doing.  If  it  is  still 
maintaining  its  organization  for  the  purpose  of  continued  effort  in 
the  pursuit  of  profit  and  gain  it  is  doing  business. 

A  corporation  owning  or  managing  real  estate  which  leases  aU  of  its 
property  but  under  the  terms  of  the  lease  is  required  to  maintain  or 
keep  the  property  in  repair  is  doing  business. 


A  corporation  engaged  in  mining  or  in  developing  and  speculating 
in  mineral  lands  is  doing  business. 

A  corporation  engaged  in  buying  and  selling  securities  or  other 
property  is  doing  business  even  though  for  a  period  it  makes  no 
purchases  or  sales  because  of  unfavorable  market  conditions. 

A  corporation  formed  to  take  over  miscellaneous  stocks,  bonds,  or 
other  property  (as  of  an  estate),  to  negotiate  sales  of  various  items 
from  time  to  time  as  opportunity  and  judgment  dictate,  and  to  dis- 
tribute the  profits  from  time  to  time  as  liquidation  is  effected,  is, 
while  so  engaged,  carrying  on  or  doing  business. 

A  parent  corporation  which  finances  or  manages  the  operations  of 
its  subsidiaries  is  doing  business. 

A  so-called  holding  company  vrhich,  under  its  charter,  is  authorized 
to  a,nd  does,  in  addition  to  receiving  and  distributing  the  avails  of 
the  property  or  securities,  held  by  it,  finance  the  operations  of  its 
subsidiaries,  is  engaged  in  doing  business. 

A  corporation  organized  for  the  purpose  of  taking  over  and  holding 
securities,  timber  land,  coal  lands,  or  other  real  estate,  is  held  to  be 
doing  business,  if  it  makes  investments  or  reinvestments  of  its  surplus 
income  or  funds  in  excess  of  an  amount  necessar)^  to  maintain  its 
original  investments. 

Art.  12.  Not  "doing  business." — ^Holding  companies  as  dis- 
tinguished from  parent  corporations,  and  corporations  all  of  whose 
property  and  business  is  operated  by,  or  is  in  the  hands  of,  a  receiver 
or  the  Alien  Property  Custodian,  are  not  doing  business. 

A  holding  company  is  defined  as  one  whose  corporate  powers  are 
limited  to  the  mere  owning  and  holding  of  property  and  distribution 
of  its  avails,  or  one  wMch,  although  incorporated  for  the  purpose  of 
doing  business  as  defined  in  article  10,  has  substantially  retired  from 
the  business  for  which  it  was  organized  and  has  reduced  its  activities 
to  the  mere  ownership  and  holding  of  property,  distributing  its  avails, 
and  doing  only  such  acts  as  are  necessary  to  the  maintenance  of  its 
corporate  existence  and  the  private  management  of  its  purely  internal 
affairs. 

A  holding  company,  as  above  defined,  will  not  be  considered  to  be 
doing  business  by  reason  of  the  reinvestment  of  its  surplus  income  or 
funds  to  the  extent  only  of  maintaining  its  original  investments. 

Art.  13.  Rate  of  tax. — The  tax  is  at  the  rate  of  $1  for  each  full 
$1,000  of  the  fair  average  value  of  the  capital  stock  of  the  corpora- 
tion in  excess  of  the  prescribed  deduction  of  $5,000.  The  tax  is  com- 
puted not  upon  the  par  value  of  the  stock,  but  upon  the  fair  average 
value  for  the  preceding  yesiT,  or  for  the  period  during  which  it  has  been 
issued,  if  less  than  a  year,  of  the  capital  stock  outstanding  at  the  date 
of  the  incidence  of  the  tax.  In  the  case  of  a  domestic  corporation  it 
181415°— 20 2 


10 

is  on  an  entirely  different  basis  from  tlie  excess  profits  tax,  wiiich  is 
concerned  with  invested  capital  and  not  with  the  fair  average  value 
of  the  capital  stock.  Stock  in  the  treasury  of  a  corporation  is  not 
regarded  as  outstanduig  unless  pledged  as  security  for  a  debt.  No 
deduction  is  allowed  corporations  organized  in  the  United  States  for 
capital  invest-C'd  outside  of  the  United  States.  If  the  corporation,  is 
doing  business  it  is  taxed  on  its  entire  capital  stock  even  though  most 
of  it  may  not  be  employed  in  the  business. 

Art.  14.  Fair  average  value  of  capital  stock. — The  fair  average 
value  of  the  capital  stock  for  the  purpose  of  determining  the  amount 
of  the  capital  stock  tax  must  not  be  confused  with  the  market  value 
of  the  shares  of  stock  vfhere  it  may  be  necessary  to  determine  such 
value  under  other  jirovisions  of  the  revenue  laws.  The  fair  average 
value  of  the  capital  stock,  the  statutory  basis  of  the  tax,  is  not  nee- 
essaj-ily  the  book  value  or  the  value  based  on  prices  realized  in  current 
sales  of  shares  of  stock  or  even  the  value,  determined  by  capitalization 
of  earnings,  although  it  maybe  more  directly  dependent  upon  the  last. 
It  should  nsualiy  be  capable  of  appraisal  by  officers  of  the  corporo- 
tion  having  a  special  knowledge  of  the  affairs  of  the  corporation  and 
general  knowledge  of  the  line  of  business  in  v\^hich  it  is  engaged. 
Provision  is  accordingly  made  in  Exhibit  C  of  Form  707  (Eevised) 
for  the  tentati^'e  determination  of  the  fair  value  of  the  capital  stock 
by  capitalizing  the  net  earnings  of  the  corporation  on  a  percentage 
basis  fixed  by  its  officers  as  fairh^  representmg  the  conditions  obtaining 
in  the  trade  and  hi  the  locality.  But  such  fair  value,  except  in  the 
case  of  insurance  companies,  must  not  be  set  at  a  sum  less  tlian  the 
reconstructed  book  value  shown  by  Exliibit  A,  unless  the  corporation 
is  materially  affected  by  extraordmar}^  conditions  whicli  support  a 
lower  valuation.  In  any  such  ease  a  full  explanation  must  accom- 
pany the  return.  The  Commissioner  ■will  estimate  the  fair  value  of 
the  ^'apital  stock  in  cases  regarded  as  involving  any  understatement 
or  undervaluation.  For  the  method  of  computing  the  fair  average 
value  of  capital  stock  in  the  case  of  insurance  companies  see  articles 
22  and  24. 

Aet.  15.  Sm-plus  aud  midivided  profits. — The  surplus  and  undivided 
profits  of  a  corporation  must  be  included  in  estunatmg  the  fair 
average  value  of  its  capital  stock.  If  the  fan*  average  value  be  de- 
termined from  the  book  value,  the  surplus  and  undivided  profits 
are  included  in  the  assets,  if  from  sales,  they  are  necessarily  a  factor 
in  determining  the  market  pricie,  and  if  from  net  income,  they  are 
reflected  to  a  greater  or  less  extent  in  the  earnings. 

Art.  1G.  Deduction  of  S5,000. — From  tlie  total  fair  average  value 
of  the  capital  stock  the  sum  of  S.5,000  is  to  be  deducted,  and  the  tax 
is  ujK)u  each  full  $1,000  td'  any  balance.  Ac<'ordingly,  corporations 
the  fau'  average  value  of  whose  capital  stock  is  not  more  than  $5,000 


11 

arc  uot  subject  to  tax,  but  for  tlie  purpose  of  avoiding  error  every 
corporation  is  required  to  file  a  return  as  directed  in  article  31. 

TAX  ON  FOREIGN  CORPORATIONS. 

Sec.  1000.  (a)  (2)  Every  foreigu  corporation  shall  pay  annually  a 
special  excise  tax  with  respect  to  carrjdng  on  or  doing  business  in  the 
United  States,  equivalent  to  ?1  for  each  ?1.000  of  the  a^-erage  amount  of 
capital  employed  in  the  transaction  of  its  business  in  the  United  tStato.3 
during  the  preceding  year  ending  June  thirtieth. 

Art.  17.  Basis  of  tlie  tax. — Tlie  basis  of  the  tax  in  the  case  of 
a  foreign  corporation  is  "carrying  on  or  doing  business  in  the  United 
States.-'  A  foreign  corporation  is  carrying  on  or  doing  business  in 
the  United  vStates  if  it  maintains  an  agent  or  an  office  or  warehouse  in 
the  United  States,  or,  in  the  case  of  an  insurance  company,  if  it  v/rites 
insurance  policies  here,  or  in  any  other  way  enters  the  United  States 
for  the  purposes  of  its  business.  The  purchase  of  supplies  in  the 
Umted  States  in  the  furtherance  of  continued  efforts  in  the  pursiiit 
of  profit  or  gain  is  carrying  on  or  doing  business  in  the  United  States. 

Aet.  18.  Capital  employed  in  the  United  States. — The  "capital 
employed  in  the  transaction  of  its  business  in  the  United  States" 
means  the  portion  of  the  total  ca|)ital,  surplus,  and  undivided  profits, 
of  the  foreign  coriDoration,  utilized  for  the  purpose  of  domg  business 
in  tlie  United  States.  A  foreign  corporation  may  have  income  from 
sources  v/ithin  the  United  States  for  the  purpose  of  the  income  tax, 
and  yet  not  have  capital  employed  in  the  transaction  of  busmess 
here  for  the  purpose  of  the  capital  stock  tax.  Compare  articles 
91-93  and  550  of  Regulations  45.  A  foreign  corporation  not  actu- 
ally doing  business  in  the  United  States  is  not  subject  to  tax,  and 
accordmgly  the  investment  of  a  part  of  its  funds  in  United 
States  stocks  and  securities  will  not  constitute  capital  employed  m 
its  business  in  the  United  States.  For  the  definition  of  "doing 
business"  see  article  10.  If  a  corporation  does  busmess  here,  then, 
although  the  mere  investment  of  funds  in  United  States  securities 
is  not  such  a  taxable  employment  of  capital,  such  investment  v.'ill 
constitute  capital  employed  in  the  transaction  of  business  in  the 
United  States,  if  made  in  a  subsidiary  corporation  which  the  foreign 
corporation  uses  as  an  instrumentalitv  for  the  successful  conduct  of 
its  own  business  in  the  United  States.  Thus  the  investment  of  the 
funds  of  a  foreign  corporation  in  the  purchase  of  facilities,  although 
apparently  independent,  for  the  purpose  of  its  busmess  here,  or  the 
purchase  of  stock  and  securities  of  a  subsidiary  corporation  for  the 
same  purpose,  will  constitute  the  employment  of  capital  in  the 
transaction  of  business  in  the  United  States.  A  foreign,  corporation 
may  not  escape  taxation  by  organizmg,  or  purcliasing  the  stock  of 
another  corporation  to  o^\^l  the  facilities  which  the  foreign  corpora- 
tion needs  in  its  busniess.     See  article  352,  Regulations  45. 


12 

Art.  19.  Capital  employed  in  the  United  States  illustrated. — A 
foreign  corporation  may  employ  capital  in  the  transaction  of  its  busi- 
ness in  the  United  States  in  various  ways.  For  example,  the  invest- 
ment of  funds  in  property  in  the  United  States  used  in  its  business, 
in  stocks  and  securities  of  subsidiary;  corporations  as  explamed  in 
article  18,  in  bills  and  accounts  receivable  representing  bushiess 
done  in  the  United  States,,  in  merchandise  kept  here  for  sale,  in 
materials  manufactured  here,  and  in  deposits  in  United  States  banks 
maintained  for  use  in  business  here.  Generally  speaking,  approxi- 
mately such  proportion  of  the  entire  capital  of  a  foreign  corporation 
will  ])resumably  be  employed  in  the  transaction  of  its  busmess  in 
the  United  States  as  the  gross  amount  of  its  business  in  the  United 
States  bears  to  its  total  gross  business,  but  this  will  not  always  be 
true,  since  a  corporation  may  conceivably  transact  a  greater  or  less 
volume  of  business  in  one  country  than  in  another  on  the  same 
amount  of  capital. 

Art.  20.  B,ate  of  tax. — The  tax  is  at  the  rate  of  $1  for  each  full 
$1,000  of  the  capital  of  a  foreign  corporation  actually  employed  in 
the  transaction  of  its  business  in  the  United  States,  and  is  in  all  cases 
to  be  computed  on  the  basis  of  the  average  amount  of  capital  so 
employed  during  the  preceding  3"ear  ending  June  30.  The  measure 
of  the  tax  is  accordingly  different  from  that  in  the  case  of  domestic 
corporations  v/hich  pay  a  tax  measured  by  the  fair  average  value  of 
their  capital  stock.  No  deduction  from  the  total  fan-  average  amount 
of  capital  so  employed  is  allowed  in  computing  the  tax. 

Art.  21.  Measure  of  tax. — The  measure  of  the  tax  is  the  average 
amount  of  capital  employed  in  the  transaction  of  business  in  the 
United  States  during  the  preceding  fiscal  year.  It  will  usually  be 
sufhcicnt  to  determine  the  amount  of  capital  so  employed  at  the 
beginning  of  each  year  and  the  amount  so  employed  at  the  end  of 
such  year,  and  to  divide  the  sum  of  such  amounts  by  two.  Where, 
however,  there  have  been  material  changes  in  the  amount  of  capital, 
the  average  amount  should  be  determined  with  due  regard  to  the 
times  at  which  such  changes  occurred.  A  foreign  corporation  may, 
if  it  so  desire,  compute  the  average  amount  of  capital  employed  on  a 
monthly  basis. 

TAX  ON  STOCK  INSURANCE  COMPANIES. 

Sec.  1000.  (b)  In  computing  the  tax  in  the  case  of  insurance  companiee 
such  deposits  and  reserve  funds  as  they  are  required  by  law  or  contract  to 
maintain  or  hold  for  the  protection  of  or  payment  to  or  apportionment  among 
policyholders  shall  not  be  included. 

Art.  22.  Stock  insurance  companies. — Insurance  companies  having 
a  capital  stock  as  distinguished  from  mutual  insurance  companies 
axe  taxable  u])on  the  same  basis  as  other  corporations,  whether 
domestic  or  foreign,  except  that  in  computing  the  tax  such  reserve 


13 

fimds,  which  incUide  deposits,  as  they  are  required  by  law  or  con- 
tract to  maintain  or  hold  for  the  protection  of,  or  payment  to,  or 
apportionment  among,  policyholdei*s,  are  not  to  be  included.  In 
the  case  of  such  companies  the  tax  will  be  computed  by  deducting 
from  the  total  book  value  of  the  assets  the  amomit  of  the  actual 
liabilities  and  legal  reserves,  unless  the  facts  in  the  case  indicate  that 
the  book  value  of  the  assets  is  substantially  different  from  their 
fair  market  value,  in  which  case  it  is  permissible  to  make  proper 
adjustment.  In  a  case  requiring  such  adjustment  the  market  value 
of  the  shares  of  stock  as  shov/n  by  Exhibit  B  or  the  net  earnings  of 
the  company  as  shov/n  by  Exhibit  C  in  Form  707  (Revised)  shall  be 
considered,  as  well  as  the  fair  value  of  the  assets. 

TAX  ON  MUTUAL  INSURANCE  COMPANIES. 

Sec.  1000.  (c)  *  *  *  The  taxes  imposed  by  this  section  shall  apply  to 
mutual  insurance  companies,  and  in  the  case  of  every  such  domestic  company 
the  tax  shall  be  equivalent  to  $1  for  each  $1,000  of  the  excess  over  $5,000  of 
the  sum  of  its  surplus  or  contingent  reserves  maintained  for  the  general  use  of 
the  business  and  any  reserves  the  net  additiens  to  vrhich  are  included  in  net 
income  under  the  provisions  of  Title  II,  as  of  the  close  of  the  preceding 
accounting  period  used  by  such  company  for  purposes  of  making  its  income 
tax  return:  Promded,  That  in  the  case  of  a  foreign  mutual  insurance  com- 
pany the  tax  shall  be  equivalent  to  §1  for  each  §1,000  of  the  same  proportion 
of  the  sum  of  such  surplus  and  reserves,  which  the  reserve  fund  upon  busineea 
transacted  within  the  United  States  is  of  the  total  reserve  upon  all  business 
transacted,  as  of  the  close  of  the  preceding  accounting  period  used  by  such 
company  for  purposes  of  making  its  income  tax  return. 

Art.  23.  Mutual  insurance  company. — The  tax  applies  to  domestic 
and  foreign  mutual  insurance  companies.  A  mutual  protective  asso- 
ciation organized  under  a  statute,  whose  only  source  of  revenue  is 
the  assessments  paid  by  its  members  and  whose  net  income  for  each 
year  is  paid  into  a  reserve  fund,  constituting  the  sole  resource  of 
the  company,  aside  from  current  assessments,  for  the  payment  of 
losses,  is  an  insurance  company  within  the  meaning  of  the  statute. 
A  voluntary  unincorporated  association  of  employees  formed  for 
the  purpose  of  relieving  sick  and  aged  members  and  the  dependents 
of  deceased  members  is  an  insurance  company,  whether  the  fund 
for  such  purpose  is  created  vdioUy  by  membership  dues  or  partly 
by  contributions  from  the  employer. 

Art.  24.  Domestic  mutual  insurance  company :  rate  of  tax. — The 
tax  is  $1  for  each  full  $1,000  of  the  excess  over  $5,000  of  the  sum  of 
(a)  the  surplus  or  contingent  reserves  maintained  for  the  general  use 
of  the  business,  and  (b)  any  reserves  the  net  additions  to  which  are 
included  in  net  income  for  the  purpose  of  the  income  tax,  in  both 
cases  figured  as  of  the  close  of  the  last  taxable  year  of  the  company. 
The  net  addition  required  by  iavv^  to  be  made  within  the  taxable  year 
to  reserve  funds,  including  in  the  case  of  assessment  insurance  com- 


14 

panies  the  actual  deposit  of  sums  with.  State  or  Ten-itorial  officers 
pursuant  to  lavr  as  additions  to  guarantee  or  reserve  funds  and,  in 
the  case  of  corporations  issuing  policies  covering  life,  health,  and 
accident  insiu-ance  combined  in  one  policy,  issued  on  the  weekly 
premium  payment  plan,  continuing  for  life  and  not  subject  to  can- 
cellation, including  such  portion  of  the  net  addition  not  required  by 
law,  made  within  the  taxable  year  to  reserve  funds  as  is  needed  for 
the  protection  of  the  holders  of  such  combination  pohcies,  is  not  in- 
cluded in  net  income  for  the  pm'pose  of  the  income  tax.  See  Regu- 
lations 45  and  particularly  articles  568-570  thereof. 

Ar'f.  25.  Foreign  matual  insurance  compa.ny:  rate  of  tax. — The 
tax  is  $1  for  each  full  $1,000  of  the  same  proportion  of  the  sum  of 
(a)  and  (1^)  in  the  last  article  which  the  reserve  fund  upon  business 
transacted  within  the  United  States  is  of  the  total  reserve  upon  all 
business  transacted,  calculated  as  of  the  close  of  the  last  taxable  year 

of  the  company. 

"       EXEMPTION  FROM  TAX. 

Sec.  1000.  (c)  The  taxes  imposed  hy  this  eoction  shall  not  apply  in  any 
year  to  any  corporation  wliich  was  not  engaged  in  husiness  (or  in  the  case  of  a 
foreign  corporation  not  engaged  in  business  in  the  United  States)  daring  the 
preceding  year  ending  June  30,  nor  to  an>'-  corporation  ennmerated  in  Fac- 
tion 231.     '■'     •■■■     •■ 

Sec.  231.  That  the  following  organizations  shall  l)e  exempt  from  taxa- 
tion under  this  title — 

(1)  Labor,  agricultural,  or  horticultural  organizations; 

(2)  Mutual  savings  banks  not  having  a  capital  stock  represented  by  shares; 

(3)  Fraternal  beneficiary  societies,  orders,  or  associations,  (a)  operating 
under  tlie  lodge  system  or  for  the  exclusive  benefit  of  the  members  of  a  fra- 
ternity itself  operating  under  the  lodge  system,  and  (b)  providing  for  the 
payment  of  life,  sick,  accident,  or  other  benefits  to  the  members  of  such 
society,  order,  or  association  or  their  dependents; 

(4)  Domestic  building  and  loan  associations  and  cooperative  banks  with- 
out capital  stock  organized  and  operated  for  mutual  purposes  and  without 
profit; 

(5)  Cemetery  companies  owned  and  operated  exclusively  for  the  benefit 
of  their  members; 

(G)  Corporations  organized  and  operated  exclusively  for  religious,  charit- 
able, scientific,  or  educational  purposes,  or  for  the  prevention  of  cruelty  to 
children  or  animals,  no  part  of  the  net  earnings  of  which  iniu-es  to  the  bene- 
fit of  any  private  stockholder  or  individual; 

(7)  Business  leagues,  chambers  of  commerce,  or  l)oards  of  trade,  not  or- 
ganized for  profit  and  no  part  of  the  net  earnings  of  which  inures  to  the  benefit 
of  any  private  stockholder  or  individual; 

(8)  Ci\'ic  leagues  or  organizations  not  organized  for  profit  luit  operated 
exclusively  for  the  promotion  of  social  welfare; 

(9)  Clubs  organized  and  operated  exclusively  for  pleasure,  recreation,  and 
other  uonprofitable  purposes,  no  i)art  of  the  net  earnings  of  which  inures  t<* 
the  benefit  of  any  private  stockholder  or  member; 


15 

(10)  Farmers'  or  otlier  mutual  hail,  cyclone,  or  fire  insui;ance  companies, 
mutual  ditch  or  irrigation  companies,  mutual  or  cooperative  telephone 
companies,  or  like  organiJ^ations  of  a  purely  local  character,  the  income  of 
which  consists  solely  of  assessments,  dues,  and  fees  collected  from  niembera 
lor  the  sole  purpose  ()f  meeting  expenses; 

(11)  Farmers',  fruit  growers',  or  like  associations,  organized  aud  uperated 
as  sales  agents  for  the  purpose  of  marketing  the  products  of  members  and 
turning  back  to  them  the  proceeds  of  sales,  less  the  necessary  selling  expenses, 
on  the  basis  of  the  quantity  of  produce  furnished  by  them; 

(12)  Coii^oratiuns  organized  for  the  exclusive  j)urpose  of  holding  title  to 
property,  collecting  income  therefrom,  and  turning  over  the  entire  amount 
thereof,  less  expenses,  to  an  organization  whicli  itself  is  exempt  from  the  tax 
imposed  by  this  title; 

(13)  Federal  land  banks  aud  national  farm-loan  associations  as  provided 
in  section  26  of  the  act  approved  July  17,  191G,  cutitled  "An  Act  to  pru\ide 
capital  for  agricultural  development,  to  create  standard  forms  of  inA'cstmcnt 
based  upon  farm  mortgage,  to  equalize  rates  of  interest  npori  fcirm  loans,  to 
furnish  a  market  for  United  States  bonds,  to  create  Government  depositaries 
and  financial  agents  for  tlic  United  States,  and  for  other  jjui^poses"; 

(14)  Personal  service  corporations. 

Sec.  200.  That  when  used  in  this  title — 

*  *  *  -K-  ->r 

The  term  "personal  service  corporation  "  means  a  corporation  whose  income 
is  to  ))e  ascribed  primarily  to  the  activities  of  the  j^rincipal  ov.-jiers  or  stock- 
holders who  are  themselves  regularly  engaged  in  tlie  active  conduct  of  the 
affairs  of  the  corporation  and  in  which  c:iipital  (whether  invested  or  borrov/ed) 
is  not  a  material  income-producing  factor;  but  does  not  include  any  foreign 
corporation,  nor  any  corporation  50  per  centum  or  more  of  whose  gross  income  - 
consists  either  (1)  of  gains,  profits  t>r  income  derived  from  trading  as  a  prin- 
cipal, or  (2)  of  gains,  profits,  commissions,  or  other  income,  derived  from  a 
Government  contract  or  contracts  made  between  April  6,  1 917,  and  November 
11,  1918,  both  dates  inclusive;    *    *    * 

Section  1.  That  when  used  in  tliis  Act — 

*  *  *  *  ■"• 

The  term  "Government  contract"  means  (a)  a  contract  made  with  the 
United  States,  or  with  any  department,  bureau,  oflScer,  commission,  board, 
or  agency,  under  the  United  States  and  acting  in  its  behalf,  or  with  any  agency 
controlled  by  any  of  the  above  if  the  contract  is  for  the  benefit  of  the  United 
States,  or  (b)  a  subcontract  made  with  a  contractor  perfoj'ming  such  a  con- 
tract if  the  products  or  services  to  be  furnished  under  the  subcontract  are 
for  the  benefit  of  the  United  States.  The  term  "Government  contract  or 
contracts  made  between  April  6,  1917,  and  November  11,  1918,  both  dates 
inclusive"  when  applied  to  a  c(mtract  of  the  kind  referred  to  in  clause  (a) 
of  this  paragraph,  includes  all  such  contracts  wliich,  although  entered  into 
dmiug  such  period,  were  originally  not  enforceable,  but  which  have  been  or 
may  become  enforceable  by  reason  of  subsequent  validation  in  pursuance 
of  law; 

Art.  2G.  Corporation  not  in  business  during  preceding  year. — Tlie 
tax  being  payable  in  advance  does  not  apply  to  any  corporation 
which  was  not  engaged  in  busiiiess  during  any  part  of  the  fiscal 
year  preceding  the  year  for  whicli  the  tax  is  due,  but  if  it  w%as  in 
business   cvc-n  one    day  of  the  })receding  year  and  one  day  of   the 


16 

taxable  year  it  is  subject  to  the  tax.  There  is  no  relation  between 
the  amount  of  the  tax  payable  and  the  length  of  time  the  corpora- 
tion was  in  business.  A  corporation,  engaged  in  business  during  a 
part  of  the  preceding  year,  but  not  engaged  in  business  at  the  begin- 
ning of  tlie  taxable  year,  is  not  required  to  make  any  return  if  it  is 
dissolved  or  in  process  of  dissolution,  but  if  it  is  only  temporarily 
inactive  and  subsequently  during  the  year  reengages  in  business  it 
should  file  a  return  in  the  month  in  which  it  recommences  business 
and  pay  the  tax  due  from  the  first  of  such  month  to  the  end  of  the 
taxable  year.  A  corporation  organized  and  beginning  corporate 
activities  on  or  after  July  1,  is  not  subject  to  tax  for  the  remainder 
of  tlie  taxable  period  in  which  the  company  was  organized,  unless, 
as  of  Jvly  7,  it  takes  over  the  business  of  an  organization  which 
was  subject  to  capital  stock  tax,  in  which  event  the  new  corpora- 
tion is  required  to  file  a  return  and  pay  the  tax.  In  the  case  of 
foreign  corporations  ''engaged  in  business,"  mea.ns  the  transaction  of 
any  business  within  the  United  States. 

Art.  27.  Exempt   organizations. — Tiie  tax  does  not  apply  to  the 
following  corporations : 

(1)  Labor,  agricultural  or  horticultural  organizations; 

Agricultiu'al  or  liorticultiiral  organizations  exempt  from  tax  do  not  include 
corporations  engaged  in  growing  agricultm-al  or  horticultural  products  or 
raising  live  stock  or  similar  products  for  profit,  but  include  only  those  organ- 
izations which,  ha\dng  no  net  income  inuring  to  the  benefit  of  their  members, 
are  educational  or  instructi^-e  in  character  and  haA-e  for  their  purpose  the 
betterment  of  the  conditions  of  those  engaged  in  these  pursuits,  the  improve- 
ment of  the  grade  of  their  products,  and  the  encoirragement  and  promotion 
of  these  industries  to  a  higher  degree  of  efiiciency.  Included  in  this  class 
as  exempt  are  organizations  such  as  county  fairs  and  like  associations  of  a 
quasi-public  character,  which,  through  a  system  of  awards,  prizes,  or  pre- 
miums are  designed  to  encourage  the  production  of  better  li-s'e  stock,  better 
agricultiu-al  and  horticultural  products,  and  whose  income,  derived  from 
gate  receipts,  entry  fees,  donations,  etc.,  is  used  exclusively  to  meet  the 
necessary  expenses  of  upkeep  and  operation.  Societies  or  associations  which 
have  for  their  purpose  the  holding  of  annual  or  periodical  race  meets,  from 
which  profits  iniu-e  or  may  inure  to  the  benefit  of  the  members  or  stock- 
holders, do  not  come  within  the  terms  of  this  exemption.  A  corporation 
engaged  in  the  business  of  raising  stock  or  poultry,  or  growing  grain,  fi'uits, 
or  other  products  of  this  character,  as  a  means  of  livelihood  and  for  the  pm*- 
pose  of  gain,  is  an  agricultiual  or  horticultural  society  only  in  the  sense  that 
its  name  indicates  the  kind  of  business  in  which  it  is  engaged,  and  it  is  not 
exempt  from  tax.     (Art.  512,  Reg.  45.) 

(2)  Mutual  savings  banks; 

A  Alassachusetts  savings  bank,  otherwise  exempt,  which  establishes  an  in- 
surance department  under  the  statutes  of  that  State,  does  not  thereby  become 
subject  to  tax.     *    *    *     .     (Art.  513,  Reg.  45.) 


17  . 

(3)  Fraternal  beneficiary  societies,  orders  or  associations; 

A  fraternal  beneficiary  society  is  exempt  from  tax  only  if  operated  under 
the  "lodge  system,"  or  for  the  exclusive  benefit  of  the  members  of  a  society 
eo  operating.  "Oi')erating  under  the  lodge  system"  means  carr^dng  on  ita 
activities  under  a  form  of  organization  that  comprises  local  branches, 
chartered  by  a  parent  orga^nization  and  largely  self-governing,  called  lodges, 
chapters,  or  the  like.  In  order  to  be  exempt  it  is  also  necessary  that  the 
society  have  an  established  system  for  the  paj^ment  to  its  members  or 
their  dependents  of  life,  sick,  accident,  or  other  benefits.     (Art.  514,  Reg.  45.) 

(4)  Domestic  building  and  loan  associations  and  cooperative  banks, 
without  capital  stock; 

A  building  and  loan  association  entitled  to  exemption  is  one  organized 
piu-suant  to  the  laws  of  the  United  States  or  of  some  State  or  Territoiy  thereof, 
which  accumulates  funds  to  be  loaned  to  its  members  and  to  be  repaid  in 
small  periodical  installments.  The  statute  requires  that  the  members  of  the 
association  shall  share  in  its  profits  on  substantially  the  same  footing.  Sub- 
ject to  this  requirement,  it  does  not  prevent  exemption  that  the  association 
issues  prepaid  stock  entitled  to  a  specified  percentage  of  the  profits.  Where, 
however,  the  association  issues  paid-up  stock,  the  holders  of  which  are 
entitled  to  a  fixed  dividend  and  also  to  share  in  the  profits  with  all  the 
other  holders  of  stock,  it  is  not  exempt.     (A-rt.  515,  Reg.  45.) 

Where  a  building  and  loan  association  lias  no  other  featui-e  which 
renders  it  liable  to  tax,  it  will  ordinarily  not  be  subject  to  tax 
merely  because  (1)  it  has  paid-up  shares  which  arc  (a)  preferred 
as  to  earnings  and  (b)  have  a  definite  rate  of  interest  which  may  be 
higher  than  the  rate  of  dividends  paid  on  other  stock,  or  (2)  its 
balance  sheets  show  that  it  is  loaning  considerable  sums  to  non- 
members,  or  (3)  it  is  a  regular  borrower  of  large  sums  of  money  which 
it  uses  for  loans  to  members,  the  dues  paid  by  members  being  entirely 
inadequate  for  the  business  transacted  by  it. 

(5)  Cemetery  companies; 

A  cemetery  company  having  a.  capital  stock  represented  by  shares,  or 
which  is  operated  for  profit  or  for  the  benefit  of  others  than  its  members,  does 
not  come  within  the  exempted  class.  A  cemetery  company  of  which  all  lot 
owners  are  members,  issuing  preferred  stock  entitling  the  holder  to  a  semi- 
annual dividend  of  four  per  cent,  and  whose  articles  of  incorporation  provide 
that  the  preferred  stock  shall  be  retii-ed  at  par  as  soon  as  suflicient  funds  are 
realized  from  sales  and  that  all  funds  realized  in  addition  thereto  shall  be  used 
by  the  company  for  the  care  and  improvement  of  the  cemetery  property,  is 
within  the  exemption.     (Art.  516,  Reg.  45.) 

(6)  Corporations  organized  and  operated  exclusively  for  religious, 
charitable,  scientific,  or  educational  purposes,  or  for  the  prevention  of 
cinielty  to  children  or  animals; 

The  exemption  applies  only  to  a  corporation  or  association.  It  does  not 
include  the  case  of  a  trust,  under  which  the  trustee  is  authorized  to  use  the 
trust  property  for  religious  purposes.  In  order  to  be  exempt  the  corporation 
or  association  must  meet  three  tests:  (a)  It  must  be  organized  and  operated 


18 

for  one  or  more  of  the  specified  purposes;  (b)  it  must  be  organized  and  operated 
exclusively  for  such  purposes;  and  (c)  no  part  of  its  income  must  inure  to  the 
benefit  of  private  stoclcholders  or  individuals. 

(1)  Chaiitable  corporations  ijiclude  an  association  for  the  relief  of  the 
families  of  clergymen,  even  though  tlie  latter  make  a  contribution  to  the  fund 
established  for  this  purpose;  or  for  furnishing  the  ser-vdces  of  trained  nurses  to 
persons  imable  to  pay  for  them ;  or  for  aiding  the  general  body  of  litigants  by 
improving  the  efficient  administration  of  justice.  Educational  corporations 
may  include  an  association  whose  sole  purpose  is  the  instruction  of  the  public. 
This  is  true  of  an  association  to  promote  acquaintance  with  the  Spanish 
language  and  literature,  although  it  has  incidental  amusement  features;  of  an 
association  to  increase  knowledge  of  the  civilization  of  another  coimtry;  and 
of  a  Chautauqua  association  -vvhoso  primary  purpose  is  to  give  iectiu'es  on 
subjects  useful  to  the  Individ  iial  and  beneficial  to  the  community  and  whose 
amusement  featiues  are  incidental  to  this  purpose.  But  associations  formed 
to  disseminate  controversial  or  partisan  propaganda  are  not  educational 
within  the  meaning  of  the  statute.  ^  ■■"  *  Scientific  corporations  include 
a,n  association  for  the  scientific  study  of  lav/,  to  the  end  of  impro^'ement  in  it-3 
administration.     (Art.  517,  Reg.  4r>.) 

A  corporation  organized  and.  operated  exclusiA^el}'^  for  the  purpose  of 
maintaining  a  syinpiiony  orchestra  and  giving  musical  concerts^  the 
programs  being  of  an  educational  character,  and  no  part  of  the  net 
earnings  inm'ing  to  the  beneiit  of  any  private  stockhoidei-  c.v  indi- 
vidual, is  orgaixized  for  '"educational  purposes."' 

(2)  Where  a  religious  corporatJou.  owns  a  large  quantity  of  farm  land  and 
works  it,  and  also  manufactures  and  sells  clothing  and  other  articles  for 
profit,  it  is  not  operated  exclusively  for  religious  puiposes  and  is  not  exempt, 
even  though  its  pioperty  is  held  in  common  and  its  profits  do  not  inure  to 
the  benefit  of  indi^-idual  members  of  the  society. 

(3)  It  does  not  prevent  exemption  that  private  individuals,  for  v/hose 
benefit  a  charity  is  organized,  receive  the  income  of  the  coi-poration  or  asso- 
ciation. The  statute  refers  to  individuals  having  a  personal  and  private 
interest  in  the  activities  of  the  corporation,  such  as  stockholders.  If,  how- 
ever, a  corporation  issues  "voting  shares,"  which  entitle  the  holders  upon 
the  dissolution  of  the  corporation  to  receive  the  proceeds  of  its  property, 
including  accumulated  income,  the  right  to  exemption  does  not  exist,  even 
though  the  by-laws  provide  that  the  shareholders  shall  not  receive  any 
dividend  or  other  return  upon  theii'  shares.     (Art.  517,  Reg.  45.) 

(7)  Business  leagues,  chambers  of  commerce  or  hoards  of  trade: 

A  business  league  is  an  association  of  persons  having  some  common  busi- 
ness interest,  which  limits  its  activities  to  work  for  such  common  interest 
and  docs  not  engage  in  a  regular  business  of  a  kind  ordinarily  carried  on  for 
profit.  Its  work  need  not  be  similar  to  that  of  a  chamber  of  commerce  or 
board  of  trade.  An  association  engaged  in  furnishing  information  to  })r.i- 
spective  investors  to  enable  them  to  make  sound  investments  is  not  such 
a  league,  since  its  members  have  no  common  business  interest,  and  it  is 
not  exempt,  even  though  all  of  its  income  is  devoted  to  the  purjwse  stated. 
A  clearing  house  association  not  organized  for  profit,  no  part  of  the  net 
income  of  which  inures  to  any  private  stockholder  or  individual,  is  exempt 
provided  its  activities  are  limited  to  the  exchange  of  checks  and  similar 


w 

work  for  the  common  Ijenefit  of  its  members.  An  associatiou  of  persona 
who  arc  engaged  in  the  business  of  carrying  freight  ami  passengers  by  boats 
propelled  by  steam,  -which  is  designed  to  promote  the  legitimate  objects 
of  such  business,  and  all  of  the  income  of  ^vhich  is  derived  from  membership 
dues  and  is  expended  for  office  expenses  and  the  salary  of  a  secretary-treasurer, 
is  exempt  from  tax.  An  incorporated  cotton  exchange,  Avhose  shares  carry 
the  right  to  dividends,  is  organized  for  profit  and  is  not  exempt.  (Art.  518, 
Reg.  45.) 

(S)  Civic  leagues  or  organizations ; 

A  corporation  having  cax>ital  stock  and  possessing  a  charter  which  authorize3 
it  to  buy,  impro\e,  and  sell  real  estate  is  organized  for  profit  within  the 
meaning  of  the  statute  and  is  not  exempt  from  tax  as  a  civic  league  or  organiza- 
tion, even  though  it  no  longer  exercises  such  powers  for  profit  and  is  operated 
exclusively  for  the  promotion  of  social  welfare.     (Art.  519,  Reg.  45.) 

(9)  Clubs; 

The  exemption  applies  to  practically  all  social  and  recreation  clu]>s  whicli 
are  supported  by  membership  feco,  dues,  and  assessments.  If  a  club,  by 
reason  of  the  comprehensive  powers  granted  in  its  charter,  engages  in  traffic, 
in  agriculture  or  horticulture,  or  in  the  sale  of  real  estate,  timber,  etc.,  for 
profit,  such  club  is  not  organized  and  operated  exclu.si\'ely  for  pleasure, 
recreation,  or  social  purposes,     "^    *    *.     (Art.  520,  Reg.  45.) 

(10)  Farmers'  or  other  mutual  Iiail,  cyclonC;  or  fire  insurance  com- 
panies, mutual  ditch  or  irrigation  companies^  mutual  or  cooperative 
telephone  companies,  or  like  organizations  of  a  purely  local  character; 

It  is  necessary  to  exemption  that  the  income  of  the  company  be  derive^i 
solely  from  assessments,  due.=,  and  fees  collected  from  mem-bers.  If  income  is 
received  from  other  soru'ces,  the  corporation  is  not  exempt,  even  though  iis 
additional  income  is  tax  exemj)t.  Income,  however,  from  sources  other  than 
those  specified  does  not  prevent  exemption  ^vhere  its  receipt  is  a  mere  incident 
of  the  business  of  the  company.  Thus  the  receipt  of  interest  ujxjn  a  working 
bank  balance,  or  of  the  proceeds  of  the  sale  of  badges,  office  supplies,  or  equip- 
ment will  not  defeat  the  exemption.  The  same  is  true  of  the  receipt  of 
interest  upon  Liberty  bonds,  where  they  were  purchased  as  a  patriotic  duty 
and  were  aftervv'ards  sold.  WTiere,  however,  such  bonds  are  bought  as  a  per- 
manent investment,  the  receipt  of  the  interest  destroys  the  exemption.  The 
receipt  of  what  is  in  substance  an  entrance  fee,  charged  by  a  mutual  fire 
insurance  company  as  a  condition  of  membership,  does  not  render  the  com- 
pany taxable,  although  this  fee  is  called  a  premium.  ]5ut  the  issuance  of 
policies  for  stipulated  c^sh  premiums  prevents  exemption.  A  local  exchange  ^ 
or  association  to  insure  the  owners  of  automobiles  against  fire,  theft,  collision, 
public  liability,  and  property  damage  is  exemjDt,  since  it  T>erfornis  functions 
of  the  same  character  as  a  mutual  fire  insurance  company  and  is  a  like  organ- 
ization \vithiu  the  meaning  of  the  statute.  A  local  reservoir  and  ditch  com- 
pany may  likewise  be  exempt  from  tax.  The  exemption  does  not  include  a 
telephone  clearing  association,  whose  business  is  to  apportion  toll  rat-e3 
between  independent  telephone  companies  handling  the  same  calls  and 
whose  income  consists  of  compensation  paid  by  such  companies  and  reccipta 
from  the  sale  of  form  blanks.  The  phrase  "of  a  purely  local  character'' 
qualilies  only  "like  organizations."     (Art.  521,  Reg.  45.) 


20 

(11)  Fai'mcrs',  fruit  growers',  or  like  associations; 

(a)  Cooperative  associations,  acting  as  sales  agents  for  farmers  or  others,  in 
order  to  come  v.-ithin  the  exemption  must  establish  that  for  their  own  account 
they  have  no  net  income.  Cooperative  dairy  companies,  which  are  engaged 
in  collecting  milk  and  disposing  of  it  or  the  products  thereof  And  distributing 
the  proceeds,  less  necessary  operating  expenses,  among  thek  members  upon 
the  basis  of  the  quantity  of  milk  or  of  butter  fat  in  the  milk  fui-nished  by 
Buch  members,  are  exempt  from  the  tax.  If  the  proceeds  of  the  business  are 
distributed  in  any  other  way  than  on  such  a  proportionate  basis,  tlie  company 
will  bo  subject  to  tax.  A  farmers'  association  is  not  exempt  from  taxation 
where  in  accounting  to  fai'mers  furnishing  produce  for  the  proceeds  of  sales  it 
deducts  more  than  the  necessary  selling  expenses  incun-ed.  (b)  Cooperative 
associations  acting  as  purchasing  agents,  distributing  to  members  in  the  guise 
of  rebates  profits  mode  from  nonmembers  are  not  exempt  from  taxation. 
(Art.  522,  Reg.  45.) 

(12)  Corporations  organized  for  the  exclusive  purpose  of  holding 
title  to  property,  collecting  income  therefrom,  and  turning  over  the 
entire  amount  thereof,  less  expenses,  to  an  organization  which  itself  is 
exempt  from  the  income  tax; 

(13)  Federal  land  banks  and  national  farm  loan  associations  as 
provided  in  section  26  of  the  act  approved  July  17,  1916,  entitled 
"An.  act  to  provide  capital  for  agricultural  development,  to  create 
standard  forms  of  investment  based  upon  farm  mortgage,  to  equalize 
rates  of  interest  upon  farm  loans,  to  furnish  a  market  for  United 
States  bonds,  to  create  Government  depositaries  and  financial  agents 
for  the  United  States,  and  for  other  purposes"; 

(14)  Pereonal  service  corporations.  (For  definition,  see  Sec.  200, 
Rev.  Act  of  1918,  p.  15.) 

Corporations  to  be  exempt  under  this  classification  must  possess 
(l)  the  following  positive  attributes: 

(a)  The  corporation's  gross  income  must  be  derived  principally 

from  compensation  for  personal  services  rendered  by  it  to 
the  persons  with  whom  it  does  business. 

(b)  The  gross  income  must  be  primarii}^  due  to  the  activities  of 

the  principal  owners  or  stocklioldcrs  who  must  be  personally 
actively  engaged  in  the  business. 

(c)  At  least  80  per  cent  of  the  capital  stock  must  be  owned  by 
•  persons  who  are  regularly  engaged  in  the  active  conduct  of 

the  business. 

(d)  The  gross  income  of  brokerage  and  agency  corporations  must 

be  based  solely  upon  commissions; 
and  (2)  the  following  negative  attributes: 

(c)  The  business  of  the  corporation  must  be  one  in  which  cap- 
ital is  not  a  material  income-producing  factor.  The  larger 
the  amount  of  capital  actually  used  the  stronger  is  the  pre- 
sumption that  capital  is  necessary  and  is  a  material  income- 
producing  factor,  and  that  the  corporation  is  not  a  personal- 
service  corporation. 


21 

(f )  The  corporation  must  not  engage  in  buying  or  selling  nor  base 

its  profits  upon  a  difference  in  price  between  the  buyer  and 
seller  nor  assume  any  such  risks  as  those  of  market  fluctua- 
tions, bad  debts,  or  failure  to  accept  shipments. 

(g)  The  corporation  must  not  make  loans  or  advances  directly  or 

indirectly,  in  order  that  it  may  render  more  satisfactory 
service  to  its  principals  or  customers, 
(h)  The  corporation  must  not  ovni  a  controlling  interest  in  a  cor- 
poration other  than  a  pei'sonal-service  corporation, 
(i)  The  corporation  must  not  employ  the  services  of  others  than 
the  principal  stockholders  to  an  extent  materially  affecting 
the  gross  income. 
In  determining  v/hether  a  corporation  is  a  personal-service  corpora- 
tion, no  v/eight  can  be  given  to  the  fact  that  the  invested  capital  of 
the  corporation  for  the  purpose  of  the  v>\ar  profits  and  excess-profits 
tax  or  the  actual  investment  of  the  principal  ov^ners  or  stockholders 
is  comparatively  small.     The  test  cstabhshed  by  the  statute  vv'ith  re- 
spect to  capital  is  entire!}"  different.     That  test  is  the  nature  of  the 
profession  or  business  as  indicated  (a)  by  the  kind  of  service  it  renders 
and  (b)  the  extent  to  v/hich  capital  is  required  to  can}"  on  such  pro- 
fession or  business.     If  the  use  of  cajDital  is  necessary  or  more  than 
incidental,  capital  is  a  material  income-producing  factor  and  the  cor- 
poration is  not  a  personal-service  corporation.     No  corporation  is  a 
personal-service  corporation  if  it  carries  on  business  of  a  kind  which 
ordinarily  requires  the  use  of  capital,  irrespective  of  whether  the 
owners  or  stockholders  have  actually  invested  a  substantial  amount 
of  capital. 

The  term  "capital"  means  not  only  capital  actually  invested  by 
the  owners  or  stockholders,  but  also  capital  secured  in  other  ways. 
Thus  if  capital  is  borrowed  either  directly  as  shown  by  bonds,  deben- 
tures, certificates  of  indebtedness,  notes,  bills  payable,  or  other 
paper,  or  indirectly  as  shown  by  accounts  payable  or  other  forms  of 
credit,  or  if  the  business  of  the  corporation  is  in  any  Avay  financed 
by  or  through  any  of  the  owners  or  stockholders,  these  facts  will  be 
deemed  evidence  that  the  use  of  capital  is  necessary.  If  a  substan- 
tial amount  of  capital  is  used  to  finance  or  carry  the  accounts  of 
chents  or  customers,  it  wiU  be  inferred  that  because  of  competition 
or  other  reasons  such  practice  is  necessary  in  order  to  secure  or  hold 
business  which  otherwise  would  be  lost,  and  that  the  corporation  is 
not  a  personal-service  corporation.  If  a  corporation  engaged  in  an 
agency,  brokerage,  or  commission  business  regularly  employs  a  sub- 
stantial amount  of  capital  to  lend  to  principals,  to  buy  and  carry 
goods  on  its  own  account,  or  to  buy  and  carry  odd  lots  in  order  that 
it  may  render  more  satisfactory  service  to  its  principals  or  customers, 
it  is  not  a  personal-service  corporation.     In  general  the  larger  the 


22 

amount  of  the  capital  actually  used  the  stronger  is  the  evidence  that 
capital  is  necessary  and  is  a  material  income-producmg  factor  and 
that  the  corporation  is  not  a  personal-service  corporation. 

Merchandising  or  trading,  either  cUrectly  or  indirect!}",  in  commodi- 
ties or  the  services  of  others  is  not  rendering  personal  service.  Hov.- 
ever,  ordinary  clerical  assistance,  and  in  technical  or  highly  special- 
ized lines  of  business,  services  of  others  may  be  emploj^ed  to  a  limited 
extent  without  causing  liability  to  attach,  provided  the  income 
attributable  to  such  employees  is  negligible  as  compared  with  tlie 
total  income  of  the  corporation. 

No  definite  and  conclusive  tests  can  be  prescribed  by  which  it  can 
be  iinall}'  determined  in  advance  of  an  examination  of  the  corpora- 
tion's return  whether  or  not  it  is  a  personal  service  corporation.  The 
foregoing  general  principles  will  govern  in  the  classification. 

To  bo  exempt  from  capital  stock  tax  corporations  must  have  pre- 
viously been  granted  full  classification  as  personal  service  corporations 
for  the  purpose  of  Federal  income  and  profits  taxes  under  Regula- 
tions 45.  revised. 

Government  contracts  may  include  (a)  a  contract  with  the  United  States, 
{b)  a  contract  with  an  agency  of  the  United  States,  (c)  a  contract  with  an 
agency  of  such  agency,  and  (d)  a  subcontract  ^Yith  a  contractor  under  any  such 
contract ;  provided  in  every  case  the  contract  or  subcontract  is  for  the  benefit  of 
the  United  States,  Unenforceable  contracts  suT:»sequently  ratified  are  treated 
as  though  made  when  originally  executed,    *    *    *    (Art.  1510,  Reg.  45.) 

""  ■"■  *  A  corporation  is  not  a  personal  service  corporation  merely  because 
less  than  50  per  cent  of  its  gross  income  was  derived  from  trading  as  a  principal 
or  from  Government  contracts.     *    •»    *    (Art.  1524,  Beg.  45.) 

A  more  detailed  discussion  of  the  subject  may  be  had  by  reference 
to  Regulations  45,  Revised. 

Art,  28.  Eeturn  by  corporation  claiming  exemption. — Where  tlie 
officers  of  a  corporation  are  of  the  opinion  that  it  is  exempt  from  the 
tax  under  section  231  of  the  Revenue  Act  of  1918,  or  on  account  of 
not  being  engaged  in  business,  Form  707  (Revised)  should  be  filled 
out  and  filed  Avith  the  collector,  together  vnth  a  comprehensive 
statement  of  the  reasons  for  claiming  exemption.  In  such  case  the 
fair  value  should  be  reported  on  page  1  of  the  form,  but  the  tax  not 
computed,  notation  "Exemption  claimed"  being  made  instead.  If 
exemption  has  been  allowed  for  the  preceding  taxable  year  and  there 
has  been  no  change  in  the  status  or  conditions  of  the  company 
then  the  first  14  lines  of  Form  707  (Revised)  should  be  completed 
and  a  statement  attached  to  the  effect  that  exemption  is  claimed  for 
the  same  reasons  as  for  the  previous  year  and  that  the  same  status 
and  conditions  of  the  company  exist  for  the  taxable  period  in  ques- 
tion. In  this  way  the  records  of  the  collectors'  offices  will  be  com- 
plete and  corporations  will  avoid  requests  for  the  filing  of  returns 


23 

and  iiunecessarv  correspondcnoe.  ThiD  determination  of  liability 
rests  in  tiie  fii'st  instance  with  the  Commissioner  of  Internal  Hevenue 
and  without  complete  information  it  is  impossible  to  malce  a  decision, 

ELECTION  TO  BE  TAXED  AS  CORPORATION. 

Sec.  330.  In  the  case  of  the  orgamzation  as  a  corporation  Ijefore  JvAj  1, 1^19, 
of  any  trade  or  business  in  which  capital  is  a  material  in<:onie-prod''a-cing  i-actor 
sead  which  was  previously  owned  by  a  partnership  or  individnai,  the  net  in- 
c-onie  of  srich  trade  or  l>iisine83  from  January  1,  1918,  to  the  date  of  such  reor- 
ganization  maj-  at  the  oi)tion  of  the  individual  or  partnership  ))e  taxed  as  xhe 
net  income  of  a  corporation  is  taxed  under  Titles  II  and  III;  in  ■v^lddi  event 
t%ie  net  income  and  invested  capital  of  such  trade  or  1)usineHs  shall  be  eom- 
pirted  as  if  such  corporation  had  been  in  existence  on  and  aftei  Janiiain- 1, 1918, 
and  the  undistributed  profits  or  earnings  of  such  trade  or  business  shull  not 
be  subject  to  the  surtax  imposed  in  section  211,  but  amonnts  distributed  t)n 
or  after  January  1,  1918,  from  the  earnings  of  such  trade  or  business  shall  be 
taxed  to  the  recipients  as  dividends,  and  all  the  provisions  of  Titles  II  and 
III  relating  to  corporations  shall  so  far  as  practieal)le  apply  to  such  trade  or 
business :  Provided,  That  this  paragraph  shall  not  apply  to  any  trade  or  busi- 
ness the  net  income  of  'whieh  for  the  taxable  year  1918  vras  less  than  20  per 
centum  of  its  invested  capital  for  such  year:  Provided  further,  That  any  tax- 
payer who  takes  advantage  of  this  paragraph  shall  pay  the  tax  imposed  by 
section  1000  of  this  Act  and  by  the  first  subdivision  of  section  407  of  the 
Revenue  Act  of  191C,  as  if  such  taxpayer  had  been  a  corporation  on  and  after 
January  1,  1918,  with  a  capital  stock  having  no  par  value. 

Akt.  29.  Election  to  be  taxed  as  corporation. — A  business  enter- 
prise (a)  which  was  organized  as  a  corporation  before  July  1,  1919, 
(b)  in  wliich  capital  is  and  has  been  a  material  income-producing 
factor,  and  (c)  which  was  previously  owned  by  a  partnership  or  indi- 
vidual, may  elect  to  be  taxed  as  a  corporation  on  its  net  income  from 
January  1,  1918,  to  the  date  of  organization  of  the  corporation.  In 
such  event  the  corporation  shall  be  treated  as  if  in  existence  since 
January  1,  1918,  for  the  purposes  of  the  income  tax,  the  war  pr(Sfits 
and  excess  profits  tax,  and  the  capital  stock  tax.  The  adoption  of 
any  other  date  than  January  1,  1918,  for  such  pm-pose  is  not  per- 
missible. But  this  option  is  not  extended  to  a  business  enterprise 
with  a  net  income  for  the  taxable  year  1918  less  than  20  per  ceiit  of  its 
invests  capital. 

The  clauses  of  section  407,  Revenue  Act  of  1916,  as  amended,  and 
section  1000,  Revenue  Act  of  1918,  which  require  that  a  corporation 
must  have  been  engaged  in  business  some  part  of  a  year  preceding 
the  taxable  period  in  order  to  be  liable  for  the  tax,  are  not  applicable 
to  corporations  filing  returns  luider  section  330  of  the  Revenue  Act 
of  1918;  that  is  to  say,  organizations  electing  to  report  as  corporations 
under  the  provisions  of  this  section,  are  required  to  file  capital  stock 
tax  returns  for  the  six  months'  period  from  January  1  to  June  30, 
1918,  and  for  all  subsequent  taxable  periods. 


24 

RETURNS  PUBLIC  RECORDS. 

Sec.  1000.  (d)  Section  257  shall  apply  to  all  returns  filed  with  the  Cummis- 
sioner  for  purposes  of  the  tax  imposed  by  this  section. 

Sec.  257.  That  retxmis  upon  which  the  tax  has  been  determined  by  the 
Commissioner  shall  constitute  pu1)lic  records;  l)ut  thej'-  shall  be  open  to 
inspection  only  upon  order  of  tlie  President  and  under  rides  and  regulations 
prescribed  by  the  Secretary  and  approved  by  the  President:  Provided,  That 
the  proper  officei's  of  any  State  imposing  an  income  tax  may,  upon  the  request 
of  the  governor  thereof,  have  access  to  the  returns  of  any  corporation,  or  to 
an  abstract  thereof  showing  the  name  and  income  of  the  corporation,  at  such 
times  and  in  such  manner  as  the  Secretary  may  prescribe:  Provided  further , 
That  all  bona  fide  stockholders  of  record  owning  1  per  centum  or  more  of  the 
outstanding  stock  of  any  corporation  shall,  upon  making  request  of  the 
Commissioner,  be  allowed  to  examine  the  annual  income  retimis  of  such 
corporation  and  of  its  subsidiaries.  Any  stockholder  who  pursuant  to  the  pro- 
visions of  this  section  is  allowed  to  examine  the  return  of  any  corporation, 
and  who  makes  known  in  any  manner  whatever  not  pro\dded  by  law  tlie 
amount  or  soru-ce  of  income,  profits,  losses,  expenditures,  or  any  particidar 
thereof,  set  forth  or  disclosed  in  any  such  retxim,  shall  be  guilty  of  a  mis- 
demeanor and  be  punished  by  a  fine  not  exceeding  $1,000,  or  by  imprison- 
ment not  exceeding  one  year,  or  both. 

The  Commissioner  shall  as  soon  as  practicable  in  each  year  cause  to  be 
prepared  and  made  available  to  public  insi^ection  in  such  manner  as  he  may 
determine,  in  the  office  of  the  collector  in  each  internal-revenue  district  and  in 
such  other  places  as  he  may  determine,  lists  containing  tlie  names  and  the 
post-office  addresses  of  all  individuals  making  income-tax  returns  in  such 
district. 

Art.  30.  Inspection  of  returns. — The  returns  upon  whicli  the  tax 
has  been  determined  by  the  Commissioner,  although  public  records, 
are  in  general  open  to  inspection  only  to  the  extent  authorized  by  the 
President.  All  bona  fide  stockholders  of  record  o^viiing  1  per  cent  or 
more  of  the  outstanding  stock  of  any  corporation  shall,  upon  making 
request  of  the  Commissioner,  be  allowed  to  examine  the  amiual 
income  returns  of  such  corporations  and  of  its  subsidiaries,  but  such 
privilege  of  examination  is  personal  and  can  not  by  power  of  attorney 
be  delegated  by  the  stockholder  to  another.  Only  such  officers  of 
any  State  as  are  charged  with  the  enforcement  of  a  State  income-tax 
law  shall  have  access  to  the  returns  of  any  corporation,  or  to  an 
abstract  thereof  showing  the  name  and  income  of  the  corporation, 
at  such  times  and  in  such  manner  as  the  Secretary  may  prescribe, 
and  then  only  in  case  the  information  is  to  be  used  by  them  in  con- 
nection with  such  enforcement.  Any  stockholder  who  is  allowed 
to  examine  the  return  of  any  corporation,  and  who  makes  known 
in  any  manner  whatever  not  provided  by  law  the  amount  or  source 
of  income,  profits,  losses,  expenditures,  or  any  particular  thereof, 
set  forth  or  disclosed  in  any  such  return,  shall  be  guilty  of  a  mis- 
demeanor and  be  punished  by  a  fine  not  exceeding  $1,000,  or  by 
imprisonment  not  exceeding  1  year,  or  both. 


25 

RETURN  OF  TAX. 

Sec.  1305.  That  all  administrative,  special,  or  stamp  provisions  of  law, 
including  the  law  relating  to  the  assessment  of  taxes,  so  far  as  applicable, 
are  hereby  extended  to  and  made  a  part  of  this  act,  and  every  person  liable 
to  any  tax  imposed  by  this  act,  or  for  the  collection  thereof,  shall  keep  such 
records  and  render,  under  oath,  such  statements  and  returns,  and  shall  com- 
ply with  such  regulations  as  the  Commissioner,  -vyith  the  approval  of  the  Sec- 
retary, may  from  time  to  time  prescribe. 

Whenever  in  the  judgment  of  the  Commissioner  necessary  he  may  require 
any  person,  by  notice  served  upon  him,  to  make  a  return  or  such  statements 
as  he  deems  sufUcient  to  show  whether  or  not  such  peraon  is  liable  to  tax. 

The  Commissioner,  for  the  purpose  of  ascertaining  the  correctness  of  any 
return  or  for  the  purpose  of  making  a  return  where  none  has  been  made,  ia 
hereby  authorized,  by  any  revenue  agent  or  inspector  designated  by  him 
for  that  purpose,  to  examine  any  books,  papers,  records,  or  memoranda  bear- 
ing upon  the  matters  required  to  be  included  in  the  return,  and  may  require 
the  attendance  of  the  person  rendering  the  return  or  of  any  ofhcer  or  employee 
of  such  person,  or  the  attendance  of  any  other  person  having  knowledge  in 
the  premises,  and  may  take  his  testimony  with  reference  to  the  matter 
required  by  law  to  be  included  in  such  return,  with  power  to  administer 
oaths  to  such  person  or  persons. 

Art.  31.  Return  by  domestic  corporation. — Every  domestic  cor- 
poration shall  make  retm-n  on  Form  707  (Revised),  regardless  of  the 
par  value  of  its  capital  stock.  Also  see  articles  28  and  33.  The 
fair  average  value  of  the  capital  stock  of  a  corporation  and  the  tax 
payable  thereon  shall  be  determined  in  accordance  with  the  instruc- 
tions in  the  form,  which  provides  in  Exhibit  A  for  the  book  or  fair 
value  of  the  assets,  in  Exhibit  B  for  the  market  value  of  the  shares^ 
and  in  Exhibit  C  for  the  value  of  the  capital  stock  based  on  the 
capitalized  earnings.  All  the  information  called  for  must  be  given  in 
every  case  where  it  is  procurable. 

Art,  32.  Return  by  foreign  corporation. — Every  foreign  corpora- 
tion carrying  on  or  doing  business  in  the  United  States  shall  make 
return  on  Form  708  (Revised),  irrespective  of  the  amount  of  capital 
employed  in  this  country  in  the  transaction  of  its  business.  The 
capital  actually  employed  in  the  transaction  of  the  business  of  a 
foreign  corporation  in  the  United  States  and  the  tax  payable  thereon 
shall  be  calculated  in  accordance  with  the  instructions  on  the  form. 
See  also  articles  17,  18,  19,  20,  and  21. 

Art.  33.  Time  for  making  return. — It  shall  be  the  duty  of  every 
corporation  liable  to  the  tax  on  or  before  the  31st  day  of  July  in  each 
year  to  make  a  return,  verified  by  oath,  to  the  collector  of  the  district 
in  which  its  prmcipal  place  of  business  is  located.  If  any  corporation 
fails  to  make  and  file  a  return  within  the  time  prescribed  by  law  or  by 
regulation  made  under  authority  of  law,  or  makes,  willfuUy  or  other- 
wise, a  false  or  fraudulent  return,  the  collector  or  deputy  collector  shall 
make  the  return  from  his  own  knowledge  and  from  such  information 
as  he  can  obtain  through  testimony  or  otherwise.     In  any  such  case 


26 

the  Commissioner  may,  from  his  ov/ii  knowledge  and  from  such  infor- 
mation as  he  can  obtain  through  testimony,  or  otherwise,  make  a 
return  or  amend  any  return  made  by  a  collector  or  deput)^  collector. 
Any  return  so  made  and  subscribed  by  the  Commissioner,  or  by  a 
collector  or  deputy  collector  and  approved  by  the  Commissioner,  shall 
be  prima  facie  good  and  sufficient  for  all  legal  purposes.  If  on  ac- 
count of  sickness  or  absence  of  the  officer  of  the  corporation  charged 
with  making  the  return,  it  is  impossible  to  prepare  and  file  a  return  on 
or  before  the  31st  day  of  July  (the  due  date),  the  collector,  upon 
application  in  writing,  may  allow  an  extension  of  time  not  exceeding 
30  days  from  July  31,  m  which  to  file  the  return.  If  extension  is 
granted,  the  letter  of  the  collector  should  be  attached  to  the  return. 
On  no  account  is  the  Commissioner  of  Internal  Revenue  or  the 
collector  authorized  to  grant  an  extension  of  time  in  which  to  file 
capital  stock  tax  returns  in  excess  of  30  days  from  July  31,  the  due 
date.  If  for  reasons,  other  than  absence  or  sickness,  beyond  the 
control  of  the  officers  making  the  return,  it  becomes  impossible  to  file 
a  completed  return  within  the  time  prescribed  by  law,  a  tentative 
return  may  be  filed,  thus  avoiding  penalty  for  failure  to  file  within 
the  prescribed  time.     See  followmg  article. 

Akt.  34.  Tentative  return. — The  filing  of  a  tentative  return  will 
avoid  the  penalty  for  delinquent  filing,  but  does  not  authorize  the 
withholding  of  the  tax.  The  regulations  do  not  permit  the  filing  of  a 
tentative  return  to  stay  indefinitely  the  filmg  of  a  completed  return 
and  the  collection  of  the  tax  due;  therefore,  a  tentative  return  clearly 
marked  "Tentative  return"  should  be  prepared  in  as  complete  a 
manner  as  possible,  including,  among  other  information,  a  basis  for 
the  computation  of  the  tax — that  is,  an  estimate  by  the  officers  of  the 
corporation  of  the  approximate  fair  value  of  the  capital  stock  in  order 
that  an  initial  assessment  may  be  made.  When  the  completed  return 
is  filed,  it  should  be  clearly  marked  "Completed  return,"  showing  that 
a  tentative  return  was  filed.  Such  action  will  prevent  duplicate  assess- 
ments and  ordmary  penalties.  In  every  case  a  statement  should  be 
attached  to  the  tentative  return,  mdicating  the  approximate  date  the 
completed  return  may  bo  expected.  Upon  receipt  of  the  completed 
return  any  adjustment  necessary  in  the  assessment  of  the  correct  tax 
due  will  be  made. 

Art.  35.  Return  by  affiliated  corporation. — Although  section  240 
of  the  Revenue  Act  of  1918  requii'cs  a  consolidated  rctm'nfor  affiliated 
corporations  for  the  piu"pose  of  income  tax, /or  the  imrpose  of  cnpital 
stock  tax  each  corporation  must  render  a  separate  return  in  complete  form. 
So-called  subsidiary  corporations,  all  or  a  part  of  the  stock  of  wliich 
is  owned  by  another  corporation,  must  render  separate  retui'iis,  the 
same  as  every  other  corporation.  No  deductions  from  the  assets  are 
permitted  on  account  of  intercompany  balances,  and  the  sharehold- 


27 

inga  must  be  reported  in  the  ''Fair  value"  column  at  their  actual 
worth  at  the  time  of  making  the  retui-n.  No  deduction  is  allowed  in 
the  retm-n  of  one  corporation  for  the  tax  paid  by  another. 

If  the  fair  value  is  determined  by  any  method  other  than  liereia 
provided,  the  following  requirements  must  be  complied  %vith:  (a)  The 
parent  company  must  submit  v\^ith  its  return  a  list  of  all  subsidiaries 
and  the  districts  in  which  the  retm-ns  were  filed ;  (b)  the  retm-n  of  the 
subsidiary  company  must  show  the  name  of  the  parent  company  and 
the  district  in  which  the  retm-n  was  filed ;  (c)  the  method  of  determin- 
ing the  fair  value,  if  other  than  by  Exhibits  A,  B,  and  C,  must  be 
fully  explained ;  (d)  a  copy  of  any  agreement  existing  between  parent 
company  and  subsidiary  must  be  fm-nished,  or  a  statement  made  that 
none  exists;  and  (e)  a  combined  balance  sheet  and  a  combined  net 
income  statement  must  be  submitted  for  consideration  in  connection 
with  any  estimate  of  fair  value  made  on  behalf  of  the  reporting 
corporation. 

PAYMENT  OF  TAX. 

Sec.  1307.  That  ia  all  cases  where  the  method  of  collecting  the  tax  imposed 
by  this  act  is  not  specifically  pro%'ided  in  tliia  act,  the  tax  shall  be  collected 
in  such  manner  as  the  Commissioner,  with  the  approval  of  the  Secretary, 
may  prescribe. 

Art.  36.  Time  for  payment  of  tax. — All  assessments  shall  be  made 
by  the  Commissioner.  The  collector  shall  within  10  days  after  re- 
ceiving any  list  of  taxes  from  the  Commissionei*  give  notice  to  each 
corporation  liable  to  pay  any  tax  stated  therein,  to  be  left  at  its  place 
of  business  or  to  be  sent  by  mail,  stating  the  amount  of  such  tax  and 
demanding  pajrment  thereof.  If  such  corporation  does  not  pay  the 
tax  within  10  days  after  the  service  or  the  sending  by  mail  of  such 
notice,  it  shall  be  the  duty  of  the  collector  to  collect  the  tax  with  a 
penalty  of  5  per  cent  additional  upon  the  amount  of  the  tax  and  in- 
terest at  the  rate  of  1  per  cent  a  month.  A  collector  has  no  authority 
to  extend  the  time  for  payment  of  the  tax,  and  any  extension  gi-anted 
by  him  will  bo  at  his  own  risk.  All  taxes  are  payable  direct  to  the 
collector  of  internal  revenue  of  the  district  in  which  retm-n  is  filed. 
The  collector  may  accept  payment  of  the  tax  when  the  return  is  filed 
as  an  ''advance  collection,"  subject  to  any  adjustment  later  found 
necessary,  but  no  corporation  is  requii'ed  to  pay  the  tax  until 
after  notice  and  demand.  Tax  due  from  a  corporation  is  legally  col- 
lectible from  the  stockholders  or  others  who  have  received  its  assets 
upon  liquidation. 

Art.  37.  Abatement  and  refund  of  taxes. — Section  3220  of  the 
Revised  Statutes,  as  amended  by  section  1316  of  the  Revenue  Act  of 
1918,  provides: 

Sec.  3220.  The  C'ommisaioner  of  Internal  Revenue,  Bubject  to  regulations 
prescribed  by  the  Secretary  of  the  Trcasriry,  is  authorized  to  remit,  refund, 
and  pay  back  all  taxes  erroneously  or  illegally  assessed  or  collected,  all 


28 

« 

penalties  collected  ■without  authority,  and  all  taxes  that  appear  to  be  un- 
justly assessed  or  excessive  in  amount,  or  in  any  manner  wrongfully  collected; 
also  to  repay  to  any  collector  or  deputy  collector  the  full  amount  of  such  sums 
of  money  as  may  be  recovered  against  him  in  any  court,  for  any  internal- 
revenue  taxes  collected  by  him,  ■\7ith  the  cost  and  expenses  of  suit;  also  all 
damages  and  costs  recovered  against  any  assessor,  assistant  assessor,  collector, 
deputy  collector,  agent,  or  inspector,  in  any  suit  brought  against  him  by 
reason  of  an^-thing  done  in  the  due  performance  of  his  official  duty,  and 
shall  make  report  to  Congress  at  the  beginning  of  each  regular  session  of 
Congress  of  all  transactions  imder  this  section. 

Section  3225  of  the  Revised  Statutes^  as  amended  by  section  1316 
of  the  Revenue  Act  of  191 8^  however,  provides: 

Sec.  3225.  When  a  second  assessment  is  made  in  case  of  any  list,  state- 
ment, or  return,  -svliich  in  the  opinion  of  the  collector  or  deputy  collector 
was  false  or  fraudulent,  or  contained  any  understatement  or  undervaluation, 
such  assessment  shall  not  be  remitted,  nor  shall  taxes  collected  under  such 
assessment  be  refunded  or  paid  back,  or  recovered  by  any  suit,  imless  it  is 
proved  that  such  list,  statement,  or  return  was  not  willfully  false  or  fraudu- 
lent and  did  not  contain  any  willful  understatement  or  xmder valuation. 

For  the  procedure  regarding  claims  for  abatement  or  refund,  see 
Regulations  14  (Revised). 

FRACTIONAL  PART  OF  CENT. 

Seq.  1313.  That  in  the  payment  of  any  tax  under  this  act  not  payable 
by  stamp  a  fractional  part  of  a  cent  shall  be  disregarded  unless  it  amounts 
to  one-half  cent  or  more,  in  wMch  case  it  shall  be  increased  to  1  cent. 

Art.  38.  When  fractional  part  of  cent  may  be  disregarded. — In 
the  payment  of  the  tax,  and  in  each  step  or  computation  necessary 
in  determining  its  amount,  a  fractional  part  of  a  cent  may  be  dis- 
regarded unless  it  amounts  to  one-half  cent  or  more,  in  which  case 
it  shall  be  increased  to  1  cent. 

MEDIUM  OF  PAYMENT  OF  TAX. 

Sec.  1314.  That  collectors  may  receive,  at  par  with  an  adjustment  for  ac- 
crued interest,  certificates  of  indebtedness  issued  by  the  United  States  and 
uncertified  checks  in  pajrment  of  incotne,  war-profits  and  excess-profits  taxes 
and  any  other  taxes  payable  other  than  by  stamp,  during  such  time  and  under 
sitch  regulations  as  the  Commissioner,  with  the  appro^-al  of  the  Secretary, 
shall  prescribe;  but  if  a  check  so  received  is  not  paid  by  the  bank  on  which 
it  is  drawn  the  person  by  whom  such  check  has  been  tendered  shall  remain 
liable  for  the  pajonent  of  the  tax  and  for  all  legal  penalties  and  additions  the 
same  as  if  such  check  had  not  been  tendered. 

Aet.  39.  Payment  of  tax  by  uncertified  checks. — Collectors  may 
accept  uncertified  checks  in  payment  of  taxes,  provided  such  checks 
are  collectible  at  par — that  is,  for  their  full  amount,  without  any 
deduction  for  exchange  or  other  charges.  The  collector  will  stamp  on 
the  face  of  each  check  before  deposit  the  words,  "This  check  is  in 
payment  of  an  obligation  to  the  United  States  and  must  be  paid  at 
par.     No  protest,"  with  his  name  and  title.     The  day  on  which  the 


29 

collector  receives  the  check  will  be  considered  the  date  of  payment  so 
far  as  the  taxpayer  is  concerned,  unless  the  check  is  returned  dishon- 
ored. If  one  check  is  remitted  to  cover  the  taxes  of  two  or  more 
corporations,  the  remittance  must  be  accompanied  by  a  letter  of 
transmittal  stating  (a)  the  name  of  the  drawer  of  the  check;  (b)  the 
amount  of  the  check;  (c)  the  amount  of  any  cash,  money  order,  or 
other  instrument  included  in  the  same  remittance;  (d)  the  name  of 
each  corporation  whose  tax  is  paid  by  the  remittance;  (e)  the 
amount  of  the  payment  on  account  of  each  corporation ;  and  (f)  the 
kind  of  tax  paid. 

Art.  40.  Procedure  with  respect  to  dishonored  checks. — If  the  bank 
on  which  any  such  check  is  drawn  shall  refuse  to  pay  it  at  par,  the 
check  shall  be  returned  through  the  depositary  bank  and  be  treated 
in  the  same  manner  as  a  bad  check.  All  expenses  incident  to  the 
attempt  to  collect  such  a  check  and  the  return  of  it  through  the 
depositary  bank  must  be  paid  by  the  drawer  of  the  check  to  the  bank 
on  which  it  is  drawn,  since  no  deduction  can  be  made  from  amounts 
received  in  payment  of  taxes.  See  section  3210  of  the  Revised 
Statutes.  If  any  taxpayer  whose  check  has  been  returned  uncol- 
lected by  the  depositary  bank  shall  fail  at  once  to  make  the  check 
good,  the  collector  shall  proceed  to  collect  the  tax  as  though  no  check 
had  been  given.  A  taxpayer  who  tenders  a  certified  check  in  pay- 
ment for  taxes  is  not  released  from  his  obligation  until  the  check  has 
been  paid.     See  chapter  191  of  the  act  of  March  2,  1911. 

CREDIT  FOR  FORMER  TAX. 

Sec.  1004.  That  if  the  tax  imposed  by  section  407  or  408  of  the  Revenue 
Act  of  1916,  for  the  fiscal  year  ending  June  30,  1919,  has  been  paid  by  any 
pereon  subject  to  the  corresponding  tax  imposed  by  this  title,  collectors 
may  issue  a  receipt  in  lieu  of  special  tax  stamp  for  the  amount  by  ■R-hich 
the  tax  under  this  title  is  in  excess  of  that  paid  or  payable  and  evidenced 
by  stamp  under  the  Revenue  Act  of  1916.  Such  receipt  shall  be  posted  as 
in  the  case  of  the  special  tax  stamp,  as  provided  by  law,  and  with  it,  within 
the  place  of  business  of  the  taxpaj^er. 

If  the  corresponding  tax  imposed  by  section  407  of  the  Revenue  Act  of 
1916  was  not  payable  by  stamp,  the  amount  paid  under  such  section  for 
any  period  for  which  a  tax  is  also  imposed  by  this  title  may  be  credited 
against  the  tax  imposed  by  this  title. 

DOING  BUSINESS  V/ITHOUT  PAYMENT  OF  TAX. 

Sec.  1005.  That  any  person  who  carries  on  any  business  or  occupation  for 
which  a  special  tax  is  imposed  by  sections  1000,  1001,  or  1002,  without  having 
paid  the  special  tax  therein  provided,  shall,  besides  being  liable  for  the  pay- 
ment of  such  special  tax,  be  subject  to  a  penalty  of  not  more  than  $1,000  or 
to  imprisonment  for  not  more  than  1  year,  or  both. 

Art.  41.  Doing  business  without  payment  of  tax. — Every  corpora^ 
tion  which  does  business  without  having  paid  the  tax  is  liable  to  a 
penalty  of  .$1,000.     A  corporation  paying  the  capital  stock  tax  is 


30 

not  on  that  account  exempt  from  any  occupational  tax.     For  other 
penalties  see  articles  42  and  43. 

PENALTIES, 

Sec.]  308.  (a)  That  any  person  required  under  Titles  *  *  *  x,  *  *  * 
to  pay,  or  to  collect,  account  for  and  pay  over  any  tax,  or  required  by  law 
or  regulations  made  under  authority  thereof  to  make  a  return  or  supply  any 
information  for  the  purposes  of  the  computation,  assessment  or  collection  of 
any  siich  tax,  who  fails  to  pay,  collect,  or  truly  account  for  and  pay  over  any 
such  tax,  make  any  such  return,  or  supply  any  such  information  at  the 
time  or  times  required  hj  law  or  regulation  shall  in  addition  to  other  penalties 
provided  by  law  be  subject  to  a  penalty  of  not  more  than  $1,000. 

(b)  Any  person  who  willfully  refuses  to  pay,  collect,  or  truly  account  for 
and  pay  over  any  such  tax,  make  such  return  or  supply  such  information  at  the 
time  or  times  required  by  law  or  regulation,  or  who  -willfully  attempts  in 
any  manner  to  evade  such  tax  shall  be  guilty  of  a  misdemeanor,  and  in  addi- 
tion to  other  penalties  provided  by  law  shall  be  fined  not  more  than  110,000 
or  imprisoned  for  not  more  than  1  year,  or  both,  together  with  the  costs  of 
prosecution. 

(c)  Any  person  who  willfully  refuses  to  pay,  collect,  or  truly  account  for 
and  pay  over  any  such  tax  shall  in  addition  to  other  penalties  provided  by 
law  be  liable  to  a  penalty  of  the  amount  of  the  tax  evaded,  or  not  paid,  col- 
lected, or  accounted  for  and  paid  over,  to  be  assessed  and  collected  in  the 
same  manner  as  taxes  are  assessed  and  collected:  Provided,  hov)ever,  That  no 
penalty  shall  be  assessed  under  this  subdivision  for  any  offense  for  which  a 
penalty  may  be  assessed  under  authority  of  section  3176  of  the  Revised 
Statutes,  as  amended,  or  of  section  605  or  629  of  this  act,  or  for  any  offense  for 
which  a  penalty  has  been  recovered  under  section  3256  of  the  Revised 
Statutes. 

(d)  The  term  "person"  as  used  in  this  section  includes  an  officer  or  em- 
ployee of  a  corporation  or  a  member  or  employee  of  a  partnership,  who 
as  such  officer,  employee,  or  member  ia  under  a  duty  to  perform  the  act 
in  respect  of  which  the  violation  occurs. 

Art.  42.  Penalty  for  nonpayment  of  tax. —  (a)  Any  corporation 
which  fails  to  pay  the  tax  when  due  and  payable  is  liable  to  a  penalty 
of  SI, 000.  If  it  willfully  refuses  to  pay  or  willfull}^  attempts  to  evade 
the  tax,  it  is  liable  also  to  a  fine  of  $10,000  and  costs  and  to  a  100  per 
cent  penalty  to  be  added  to  the  tax.  See  also  article  41.  (b)  Any 
officer  or  employee  of  a  corporation  who  in  the  course  of  his  duty  fails 
to  pay  the  tax  when  due  and  payable  is  liable  to  a  penalty  of  $1,000. 
If  he  willfully  refuses  to  pay  or  willfull,y  attempts  to  evade  the  tax, 
he  is  liable  also  to  a  fine  of  $10,000  and  costs  and  to  imprisonment 
for  a  year,  and  to  a  penalty  of  the  amount  of  the  tax  unpaid  or 
evaded. 

Art.  43.  Penalties  for  failure  to  make  return  and  for  false  re- 
turn.—  (a)  Any  corporation  which  fails  to  make  a  return  within  the 
required  time  is  liable  to  a  penalty  of  $1,000.  If  it  willfully  refuses 
to  make  a  return  it  is  liable  also  to  a  fine  of  $10,000  and  costs. 
(b)  Any  officer  or  employee  of  a  corporation  who  in  the  course  of  his 
duty  fails  to  make  a  return  within  the  required  time  is  liable  to  a  penalty 


31 

of  $1,000,  If  lie  willfully  refuses  to  make  a  return  he  is  liable  also  to 
a  fine  of  $10,000  and  costs  and  to  imprisonment  for  a  year,  (o)  Sec- 
tion 3176  of  the  Revised  Statutes,  as  amended  by  section  1317  of  the 
Revenue  Act  of  1918,  also  provides: 

lu  ca?e  of  any  failure  to  make  and  file  a  return  or  list  within  the  time  pre- 
scribed by  law,  or  prescribed  by  the  Commissioner  cf  Internal  Revenue  or 
the  collector  in  pursuance  of  law,  the  Commissioner  of  Internal  Revenue  shall 
add  to  the  tax  25  per  centum  of  its  amount,  except  that  when  a  return  is  filed 
after  such  time  and  it  is  shown  that  the  failure  to  file  it  was  due  to  a  reason- 
able cause  and  not  to  willful  neglect,  no  such  addition  shall  be  made  to  the 
tax.  In  case  a  false  or  fraudulent  return  or  list  is  ^vilU'ully  made,  the  Commis- 
sioner of  Internal  Revenue  shall  add  to  the  tax  50  per  centum  of  its  amount. 

The  amount  so  added  to  any  tax  shall  be  collected  at  the  same  time  and  in 
the  same  manner  and  as  part  of  the  tax  unless  the  tax  has  been  paid  before 
the  discovery  of  the  neglect,  falsity,  or  fraud,  in  which  case  the  amoiuit  so 
added  shall  be  collected  in  the  same  manner  as  the  tax. 

AUTHORITY  FOR  REGULATIONS. 

Sec.  1-309.  That  the  Commissioner,  with  the  approval  of  the  Secretaiy,  is 
hereby  authorized  to  make  all  needful  rules  and  regulations  for  the  enforce- 
ment of  the  provisions  of  this  act. 

Art.  44.  Promulgatiou  of  regulatious. — In  pursuance  of  the 
statute  the  foregomg  regulations  are  hereby  made  and  promulgated 
and  all  rulmgs  inconsistent  herewith  are  hereby  revoked. 

Paul  F.  Myers, 

Acting  Commissioner  of  Internal  Bevenue. 

Approved  June  21,  1020: 
R.  C.  Leffingwell, 

Acting  Seer etai'y  oftlie  Treasury. 

o 


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